Kevin Warsh thinks the Fed is busted

KEVIN WARSH THINKS THE FED IS BUSTED — Former Federal Reserve Governor Kevin Warsh, who nearly became Fed Chair, sat down with a group of reporters in Palo Alto, Calif. on Thursday night for his first on record comments since the top central bank job went to Jay Powell (the latter part of the evening featured some impromptu poolside guitar work by CNBC’s Steve Liesman).

Warsh offered a fairly stark assessment of the Fed including its reliance on antiquated data sets (including today’s jobs report) and obsession with a 2 percent inflation target that is certainly not precise to the decimal point. Had he gotten the Fed gig, Warsh said he would have harnessed the many big brains inside the central bank to find better data.

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Warsh: “The place is thirsting to be led in new directions … I have the impression … that they are waiting on the payroll number … and they think it’s filled with important insights about the economy.” He also dismissed the idea that slightly faster wage growth should cause the Fed to panic about inflation.

“A catch-up in wages would not tell me that ‘oh my goodness, inflation is coming.’ I do not have a 1978 view that unions have bargaining power and that will send us on a wage-plus-price spiral that’s going to lead to inflation.”

Warsh would not go into the topic but during the Fed search, senior administration officials suggested that Treasury Secretary Steven Mnuchin helped kill his candidacy for the Fed, arguing strongly to Trump that Powell could be better counted on not to bump up rates too fast in a way that could slow potential growth from the tax cut plan.

Many close Washington watchers believe that significant tension will eventually emerge between Trump – who wants rates held low – and Powell, who is likely to push back at any hints of political interference and defend the central bank as an independent institution that makes decision with the long-term health of the economy in mind. The idea that Powell will bend to White House desires to let inflation run significantly ahead of the Fed’s target for a long period of time is probably wrong.

FUN LINE from Warsh on the Fed chair gig: “At some point here I thought I had this job so I had to think these things through.”

SPEAKING OF OLD FASHIONED DATA … WELCOME TO JOBS DAY! — The April report is expected to bounce back close to 200K after March’s 103K disappointment with joblessness possibly dropping to 4.0 percent or even below. Markets won’t want a number that is too hot for fear of adding an extra Fed rate hike this year.

Moody’s Mark Zandi: “Businesses added a strong 210,000 jobs to their payrolls in April. … Abstracting from the vagaries of the data, wage growth is closing in on 3%. It is a good time to be looking for work.

“There are a record number of job openings, across nearly all industries (retailing being the key exception) and in nearly all parts of the country. … While the job market is hot, it is set to get hotter, and threatens to overheat. The current pace of job growth is more than double the growth in the labor force, and unemployment will soon be in the threes.”

MONEY LINE: “Labor shortages are developing in construction (if the President wants to build the wall on the border he will need to hire Mexican workers to do it), transportation, and parts of manufacturing.”

Dun & Bradstreet’s Bodhi Ganguli: “Dun & Bradstreet forecasts that 187, 000 jobs were added in April, bringing hiring back closer to its 2017 average after the March disappointment. …

“[T]he FOMC monetary policy statement made it clear that they have a ‘symmetric’ 2% target. In other words, they are perfectly comfortable to let inflation run above the 2% target for a short while. As such, we will be watching the wage growth number carefully to see if there is evidence of upward wage pressure, and whether that will have an impact on the FOMC’s rate plans for the rest of the year.”

Pantheon’s Ian Shepherdson: “April payroll growth likely will be reported at close to 200K. Overall, the survey evidence points to a stronger performance, but they don't take account of weather effects, and April was a bit colder and snowier thanusual.

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TARIFF IMPACT? — “Yesterday's ISM non-manufacturing survey surprised to the downside, but we aren't much concerned by the headline. … Behind the headline index, though, we are not so relaxed about the employment index, which dropped in April to a 12-month low. … [T]he NFIB survey's April measure of hiring plans dropped four points to a 10-month low. …

“We aren't about to panic about downside risks to growth. But it is reasonable to argue that all the talk of tariffs and trade wars, and the accompanying drop in stock prices, is unsettling businesses, at least temporarily. Marginal decisions on hiring and capex appear to be falling into the ‘no’ column”

Kevin Warsh has feelings about the Fed. | AP Photo

GOOD FRIDAY MORNING — Greetings from Palo Alto, where MM is attending a monetary policy symposium at Stanford’s Hoover Institution. Not exactly Tom Brady and Goldie Hawn at Milken but should be wonky fun. Email me on bwhite@politico.com and follow me on Twitter @morningmoneyben. Email Aubree Eliza Weaver on aweaver@politico.com and follow her on Twitter @AubreeEWeaver.

DRIVING THE DAY — Jobs report at 8:30 a.m. expected to show a gain of 185K with no change to 4.1 percent unemployment rate and wages up 0.2 percent … President Trump speaks to the NRA in Dallas this afternoon.

SEC TARGETS HOVA — POLITICO’s Patrick Temple-West: “The Securities and Exchange Commission is asking a court to force Shawn Carter — better known as rapper Jay-Z — to comply with a subpoena to testify about potential violations of securities laws, the agency said today.

“In a case filed in federal court in the Southern District of New York, the SEC said its investigation is connected to financial reports filed by Iconix Brand Group Inc., which has paid Carter more than $200 million to acquire intangible assets. The SEC said it wants Carter to testify about his joint ventures with Iconix. The agency initially issued a subpoena for Carter's testimony on Nov. 16, 2017. On Feb. 23, 2018, after Carter retained new counsel, the SEC issued a second subpoena for him to testify.” Read more.

WHITE HOUSE LOOKS TO TRIM SPENDING — POLITICO’s Sarah Ferris and John Bresnahan: “The White House will formally ask Congress on Monday to slash $11 billion from old spending accounts, according to two Republican aides on Capitol Hill familiar with the plan. That would mean the Trump administration would again downsize ambitions for a presidential rescissions package.

“Some in the administration were initially eyeing a package of cuts up to $60 billion. A top appropriator later said that figure had shrunk to $25 billion. An administration official, speaking on background, said ‘the number is still in flux’ but did not dispute the $11 billion figure. The proposal expected to land on Capitol Hill on Monday will not target funds from the recently passed $1.3 trillion spending bill” Read more.

CFOs WORRY ABOUT PROTECTIONISM — From the Zurich Insurance Group, EY and The Atlantic Council survey of over 500 CFOs: “61% of respondents indicated they are confident or extremely confident about investing in the US," but "68% of CFOs surveyed expect growth of US protectionism in the next one to three years, and 46% fear this growth will negatively impact investment." Read more

MARKETS

LATE BUYING DRIVE ERASES STOCKS’ EARLY LOSS — AP’s Marley Jay: “Losses for health care companies and banks left U.S. stocks lower Thursday, although a late push for technology and industrial companies helped the market avoid a steeper decline. After a weak finish the day before, the Dow Jones industrial average dropped as much as 393 points Thursday morning. Thanks to another gain in Boeing, it ended slightly higher.

WALL STREET FEAR GAUGE JUMPS LIKE NEVER BEFORE — Bloomberg’s Luke Kawa: “The wall of worry is growing taller. Not only has the S&P 500 Index breached its 200-day moving average, but the Cboe Volatility Index -- the VIX, Wall Street’s fear gauge — leapt from below 15 intraday on Wednesday to above 18 in trading on Thursday.

“As Twitter user OddStats notes, the last time this happened in consecutive sessions was Feb. 2-5, when a record spike in the VIX catalyzed the biggest one-day drop in the benchmark U.S. stock gauge since 2011.”” Read more.

BEST EARNINGS QUARTER SINCE 2011 — WSJ’s Theo Francis and Richard Rubin: “The largest U.S. companies found a new formula for success in the first quarter: larger pretax profits and smaller tax bills—mostly compliments of the federal tax overhaul.

“More than half of the combined net-income growth reported by 200 large public companies for the first quarter stemmed from a decline in the companies’ effective tax rates, a Wall Street Journal analysis of quarterly financial data from Calcbench found. At a third of the companies, tax expenses fell in dollar terms even as pretax income rose, boosted by strong revenue growth and the expanding economy” Read more.

BOND INVESTORS PULL MONEY FROM EMERGING MARKETS — FT’s Joe Rennison and Robin Wigglesworth: “Emerging market bond funds suffered the first two-week spell of outflows since 2016, as a stronger U.S. dollar raised fears about companies’ ability to repay dollar-denominated debt. Investors withdrew almost $1bn from global emerging market bond funds for the week ending May 2 … the largest outflow since February’s market turmoil and the first time the asset class has suffered two consecutive weekly outflows in 16 months”” Read more.

FLY AROUND

MNUCHIN FEELS GOOD ABOUT TRADE TALKS — Reuters’ Sue-Lin Wong: “U.S. Treasury Secretary Steven Mnuchin said on Friday a trade delegation he’s leading in China has been having very good conversations, as he heads into the second and likely last day of talks in Beijing. A breakthrough deal to fundamentally change China’s economic policies is viewed as highly unlikely during the two-day visit, though a package of short-term Chinese measures could delay a U.S. decision to impose tariffs on about $50 billion worth of Chinese exports.

“The discussions, led by Mnuchin and Chinese Vice Premier Liu He, are expected to cover a wide range of U.S. complaints about China’s trade practices, from accusations of forced technology transfers to state subsidies for technology development. ‘We are having very good conversations,’ Mnuchin told reporters as he left his hotel. He made no other remarks.” Read more.

MUSK’S COMMENTS RADIATE ACROSS WALL STREET — AP’s Tom Krisher: “Elon Musk’s quirky behavior has long been chalked up to that of a misunderstood genius. But never have his actions caused so much angst on Wall Street. Investors have for years endured millions of dollars in short-term losses in hopes of a long-term payoff.

“They might have even been able to stomach the $8.3 million that Telsa Inc. burns through each day. But it was a conference call Wednesday night that left many wondering how much more they can take.”” Read more.

THERANOS INVESTORS LOST MORE THAN $600M — WSJ’s John Carreyrou: “A who’s who of government, business and international finance lost a total of more than $600 million they had invested in scandal-plagued Theranos Inc., according to previously sealed documents made public in a lawsuit. High on the list is Education Secretary Betsy DeVos, whose family invested $100 million in the Silicon Valley blood-testing company, the documents show” Read more.

SHOULD BITCOIN BULLS BE CELEBRATING? — Bloomberg’s Lily Katz: “Bitcoin bulls may want to curb their enthusiasm. The cryptocurrency rose toward a two-month high Thursday amid optimism sparked by news that Goldman Sachs is moving forward with Bitcoin trading operations. Adding to the gleeful tone, Square’s latest report included a line suggesting it got $34 million of revenue related to the tokens last quarter.

“Yet, there were key details in both reports that perhaps could give investors pause. Goldman isn’t buying and selling actual Bitcoins. Instead it’s taking a step forward with long-disclosed efforts to explore crypto trading, planning to start small by offering a limited number of derivatives, according to a person briefed on the decisions.” Read more.

BERKSHIRE NOW SECOND LARGEST REAL-ESTATE BROKER — WSJ’s Nicole Friedman: “Warren Buffett’s Berkshire Hathaway Inc. is a big name on Wall Street. Increasingly, it’s a fixture on Main Street too. The Omaha conglomerate was the nation’s second-largest residential real-estate brokerage last year, making Berkshire Hathaway a presence on neighborhood yard signs from Los Angeles to New York. It has franchised the Berkshire Hathaway HomeServices name to 1,330 offices and more than 45,000 agents.

“Mr. Buffett, Berkshire’s chairman and chief executive, wants his franchise brokerage business, HomeServices of America, to get even bigger—and the sterling Berkshire Hathaway brand is an asset. But further expansion could also bring more visibility and risk for the Berkshire brand. Historically, its biggest consumer-facing companies — brands like Geico, Dairy Queen and Fruit of the Loom — haven’t used the parent company’s name.” Read more.

WALL STREET’S BIG GENDER LAWSUIT, 13 YEARS IN THE MAKING — Bloomberg’s Dune Lawrence and Max Abelson: “Cristina Chen-Oster was settling into her seat for a late-March Broadway matinee of Mean Girls when she remembered to check her voicemail. The day before, she’d ignored a call from an unrecognized number. Now she hit play and heard the voice of her lawyer, Kelly Dermody: ‘Huge congratulations!’ it said. ‘Really, really, really, really happy for you.’

“Dermody was relaying news that Chen-Oster, a former vice president at Goldman Sachs, had been awaiting for years. A federal judge in New York had ruled that she and three other women who claim there’s systematic gender discrimination at Goldman can now represent as many as 2,300 other current and former employees.” Read more.

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About The Author : Ben White

Ben White is POLITICO Pro's chief economic correspondent and author of the “Morning Money” column covering the nexus of finance and public policy.

Prior to joining POLITICO in the fall of 2009, Mr. White served as a Wall Street reporter for the New York Times, where he shared a Society of Business Editors and Writers award for breaking news coverage of the financial crisis.

From 2005 to 2007, White was Wall Street correspondent and U.S. Banking Editor at the Financial Times.

White worked at the Washington Post for nine years before joining the FT. He served as national political researcher and research assistant to columnist David S. Broder and later as Wall Street correspondent.

White, a 1994 graduate of Kenyon College, has two sons and lives in New York City.

About The Author : Aubree Eliza Weaver

Aubree Eliza Weaver is a deputy production director for POLITICO Pro, having previously served as a senior web producer. Aubree also co-authors Morning Money, POLITICO's daily morning newsletter on Washington and Wall Street.

She graduated from Le Moyne College in her hometown of Syracuse, N.Y., where she was the editor-in-chief of the school’s newspaper, The Dolphin. As a student, she interned with Time Warner Cable’s Syracuse affiliate, YNN, as a news broadcast intern. Aubree moved to D.C. upon graduating in 2013 to work as a summer program adviser for the Institute on Political Journalism. She was a student in the program in the summer of 2011, when she first fell in love with D.C.